Follow this topicParents, give your child a decent retirement!
Guest blogger John Lawson of Standard Life looks at whether parents should consider paying into pensions for their children.
In 1957, Prime Minister Harold MacMillan told Conservative party colleagues, “Most of our people have never had it so good”. The UK had achieved a level of prosperity hitherto seen.
Fifty-odd years on, the children born in those prosperous times are now approaching retirement. They form the bulk of what we now call the “baby boomers” and prosperity for them has continued to increase apace since the 1950s.
According to the Office for National Statistics' Wealth and Assets survey, wealth is heavily concentrated in those aged 45-74, and even more so within the 55-64 age band. Over two-thirds of the seven million people in this narrower band have pensions worth an average of £350,000 each. Eight in 10 of this group also own property worth over a quarter of a million pounds on average.
Contrast this to their sons and daughters in the 16-24 age group, only 11% of whom have a pension. Only 20% own property. The position for their older brothers and sisters in the 25-34 age range isn’t much better.
Current economic woes have made it more difficult for young people to find a job, with unemployment in the under-24s running at over 20%, nearly three times the average for the whole workforce.
Among those who have avoided the dole queue are university students, but financial life for them is no walk in the park. Student debt is already at record levels and set to go even higher once the tuition fee hike bites. Last year’s intake is expected to leave university with average debts of £25,000, and for this year’s newbies the figure may be nearer £40,000.
Unlike their mothers and fathers, these graduates will also have to compete in a global labour market against a huge number of well-educated Indian and Chinese youngsters whose wage demands are somewhat lower than those of British graduates.
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See the guideWith lower than expected earnings, paying off that student debt may take longer, as will the time taken to reach the first rung of the housing ladder.
It may not have registered with them yet, but unlike their baby boomer parents, the lives of Generation Y may be marked by static or falling prosperity. It is little wonder that only a tenth of them have a pension.
Apart from the huge contribution that saving makes to economic growth, at an individual level, starting to save as early as possible makes a lot of sense. Even more so when that saving goes into a pension.
The power of tax relief and 40 or 50 years of compound interest can really grow mighty oaks from little acorns. Even investing in a lower risk investment, returning only 2% above inflation, £100 a month saved with basic rate tax relief would turn into nearly £110,000 (in today’s money), 45 years down the road.
That is enough to buy a retirement income equal to the current basic State Pension.
The problem for younger people is that they can’t afford to save. Not so their baby boomer parents.
Rather than give money directly to their children, much of which will be quickly spent on a lifestyle they can have little hope of maintaining, gifting money into their children’s pensions may be a better plan.
Parents can pay into each of their children’s pensions the higher of 100% of their child’s earnings or £3,600, every year. Tax relief is calculated on the basis of the child’s highest marginal tax rate with a minimum of 20%.
They may not thank their baby boomer parents now for a present that they can’t open for another couple of decades, but when they reach middle age, they may be able to say “we almost had it as good as mum and dad”.
John Lawson is head of pension policy at Standard Life.
More: Government plan could shrink your pension | Don’t try to cash in on your home like this!
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